New rules around small business lending are too harsh and have pushed banks away from SMEs and into the mortgage market, Vince Cable said today.
To get around the system – which can force banks to hold five-times more capital against SME loans than home loans – he is offering government guarantees for business lending.
The British Business Bank he set up gives the guarantees to banks, making their loans appear safer and so reducing the capital held against them. As a result banks can lend more money to SMEs against the same sized capital buffer.
The rules are designed to make banks safer by forcing them to hold bigger buffers against riskier loans, and so making them less likely to collapse when a recession strikes – but they can also make it harder and more expensive to make those risky SME loans, and Cable wants to get around this barrier.
“British regulators are constrained by international rules on capital. These ratios have international force and are difficult to manipulate in convenient way, even if they wanted to,” Cable said in a speech at Bloomberg News. The British Business Bank has generated £780m of new lending in the last year, he said, half through alternative finance like peer-to-peer lending, and half through traditional loan guarantees.
“We are piloting wholesale guarantees, where the government guarantees apply to new SME portfolios by banks,” Cable said. “It will make lending more attractive and allows banks to lend significantly more on the back of the same capital buffer.”